Banks: buy, sell or hold?

By Nick RadgeFebruary 2016min read

What the share-price charts say about CBA, NAB, ANZ and Westpac.

Back in November 2014 we did some deep diving on the big four banks from a technical perspective, for ASX Investor Update. At the time, I suggested that upward momentum was weakening and highlighted some potential price levels that could be expected if the declines did indeed unfold.

In consideration of the 2015 weakness and the added headwinds of media rumours about a potential cut in the ANZ dividend, it is certainly timely to take another look and see what the charts portend for 2016 and beyond.

The following chart of Australian bank stocks gives a quick snapshot of percentage progress since 2009. (Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

Commonwealth Bank (CBA) remains the leader of the pack. But ANZ Banking Group (ANZ) has been relegated to third place behind Westpac Banking Corporation (WBC) and is making inroads on NAB’s lower returns over the years. Macquarie Group (MQG) has shown an admirable performance, albeit with heightened volatility.

Source: Premium Data

Before looking closely at the charts, it’s a good time for a brief overview of what technical analysis is and what it isn’t. Technical analysis is not about prediction. After 30 years in the business I can assure you there is almost no predictive power behind technical analysis. Instead, it is all about pattern progression and monitoring price patterns that are created by the collective actions of all market participants.

Market participants are human and they tend to operate in repeatable patterns, the same as they have for decades, and in doing so we are able to recognise and act on the “footprints” created.

The key is not predicting what pattern will come next. Rather, to understand what is expected of a particular pattern and that it continues to be validated; that is, the pattern continues to unfold as it has in the past. If a pattern is continually proven then we should anticipate that the market will progress as expected.

If an existing pattern is disproved, it will be amended and the new pattern takes precedence and positions can be adjusted accordingly. This is really no different to a re-rating of a company’s fundamentals – when new information comes to hand an amended outlook may take precedence.

Sector overview

With that in mind, let’s look at the ASX-200 Financials (ex-Real Estate Investment Trusts) chart (below), which offers a broad overview of the sector. The run higher off the 2009 lows to the major highs annotated at A is extremely constructive and points toward an ongoing bullish posture. Normal pattern progression suggests that prices should now consolidate above point B in a broad and lengthy grind.

While there will be opportunities for nimble investors during this period, it is highly improbable that the highs at point A will be seen for many years and that the favourable trends seen in 2009 and again from 2012 are a long way off.

Prices must remain above point B, or approximately the 6000 level, as a break of B invalidates the larger bullish outlook and potentially suggests a return to the lows seen in 2011, or possibly back to those in 2009.

Source: Premium Data

CBA holding it together

The next chart is CBA, which technically remains the strongest of the bank stocks, as it was in late 2014. The picture is almost identical to that of the sector chart above. The best-case outlook here is that prices will consolidate in a broad holding pattern over the coming years between $70 and $92. Normal price progression at this stage of the trend suggests the stock will be unable to breach new highs for some time.

On the downside, which needs serious contemplation considering current investor sentiment, a break below $70 is a red flag and an initial warning that the larger bullish pattern is beginning to fail for CBA. That has already started to happen with some of the banks.

Source: Premium Data

ANZ breaches support

Back in 2014 we expected ANZ to “... move back into the zone ... between $26.50 and $28.50”. This was considered the normal pattern progression within a larger bullish outlook. However, the all-important line in the sand at point B has now been penetrated on the back of a Morgan Stanley downgrade coupled with a warning of a potential dividend cut.

Technically, the breach of the $26 level invalidates our previous bullish stance and now places the stock into a very long-term neutral position. Weakness could prevail in the near term and take prices closer to $20–$22 before any reasonable bounce takes shape. The key word here is bounce and not a new trend higher, and certainly not back above the $36 highs.

Source: Premium Data

Westpac still holding

WBC is in a similar position to CBA in that it is holding above the $28 line, which will invalidate any medium-term bullish view. The move off the 2009 lows has not been as smooth as that of CBA and a meandering rise is not a strong foundation for a longer-term upward trend. Should investor sentiment continue to wane, I expect WBC will probe down towards $28.

The laggard is National Australia Bank, which was unconvincing back in late 2014 and is some 30 per cent off its recent highs. Ongoing weakness may see prices slip further toward $25 but any bounce, should it occur, will be limited to the $31–$33 area.
In summary, it appears banks are, at best, ready to tread water for several years. There will be scope to buy into the weakness and sell into the bounces, but we are firmly of the view that sustainable uptrends once enjoyed will not present themselves again for some time.
In these circumstances, the pick of the banks would be those holding above their support points and showing the highest relative strength.

About the author

Nick Radge is head of trading and research at The Chartist; He has more than 27 years' experience in financial markets, from the trading floor of the Sydney Futures Exchange to international dealing desks in London, Singapore and Sydney. He has authored several books on trading and investing, including his bestseller, Unholy Grails - A New Road to Wealth. Contact Nick on Twitter @thechartist.

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This article appeared in the February 2016 ASX Investor Update
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This article appeared in the February 2016 ASX Investor Update email newsletter. To subscribe to this newsletter please register with MyASX.

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